CATASTROPHE RISK AGGREGATION

33rd ANNUAL GIRO CONVENTIONHilton Vienna Hotel, Am Stadtpark

JB CROZETREEKEN PATEL

INTRODUCTION

A Stat & A Quote

Catastrophe Aggregation Monitoring “quantifying the potential losses from catastrophic events, across all the policies sold by the company” is the 2006 MIICA.

Most Important Issue on CEO's Agenda for 2006

1.00

1.07

1.07

2.07

2.50

3.07

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Capital levels and allocation

Improved management information

New markets (geographical)

Embedding capital and risk management w ithin the day-to-day running of the business

Achieving comparable underwriting performance to 2005and institutionalising effective cycle management

Effective monitoring of aggregations of exposure andoptimised reinsurance spend

Source: PricewaterhouseCoopers 2006

A Stat & A Quote

London Market Survey - CEO Quotes:

“Effective aggregation management is an imperative. If you could point to a benefit of the hurricane losses of 2005 it is the extent to which the monitoring of aggregate exposures is more visible and their management more disciplined within our business.”

“Our progress against our forecast aggregate tracks is now the first piece of management information the board reviews on a monthly basis.”

Storyboard

Catastrophe Risk Aggregation is very high on (re) insurers’ agenda

the pressure comes from capital providers, rating agencies, regulators and Lloyd’s.

while principles are fairly simple, practical implementation isfraught with difficulties.

the market is evolving quickly towards more robust approaches, and a wider spectrum of risks.

Agenda

- Introduction- Why monitor catastrophe aggregations? - Principles- Current Developments- Wider Risks- Conclusions

Why monitor catastrophe aggregations?

Why monitor catastrophe aggregations?

Shareholders/ Names

Rating AgenciesRegulator

ICA and other internal MI

Why monitor catastrophe aggregations?Regulator

Appropriate accumulations considered

All data captured

Regular reporting

Outputs validated

Output integrated with mgt processes

Robust modelling process

Why monitor catastrophe aggregations?Capital Providers

Potential downside requires distinct risk management approachTend toward aggregation following periods of low activitySignificant risk to solvency and capitalisationImpact on capital requirements and cashflow

Why monitor catastrophe aggregations?Capital Providers

Stock graphs?

Source: www.moneycentral.msn.com

Why monitor catastrophe aggregations?Capital Providers

Source: www.moneycentral.msn.com

Why monitor catastrophe aggregations?Rating agencies

More rigorous approach in their reliance on catastrophe modelling outputsA.M Best has announced higher minimum standards, with penalty loads for non-complianceA.M Best has now a single event, a terrorism and a second event stress test in their ratings methodologyS&P is expanding its reinsurance catastrophe criteria to primary insurers, and replacing the NWP base approach

Why monitor catastrophe aggregations?MI including ICAs

FSA wants to see the ICA used in the decision making processInsurance risks from catastrophe exposures can present the most significant risk within an ICAReserve risk on known lossesUnderwriting risk on future losses

PRINCIPLES

4-Step Exposure Management Framework

defining riskappetite

capturing exposure

information

measuring catastropheexposures

managing exposures

Defining Risk Appetite defining riskappetite

capturing exposure

information

measuring catastropheexposures

managing exposures

Cash-Flows

Earnings Volatility

ExpectedProfitability

AvailabilityReinsurance

Solvency

RatingInvestors

Criteria

Company-WideLine of Business

CapitalPremiums

AnnualPer Event

VaR/tVaRP(Ruin)

Definition

Underwriting Perspective defining riskappetite

capturing exposure

information

measuring catastropheexposures

managing exposures

OFFSHOREENERGY

HOMEOWNERS

COMMERCIALPROPERTY

AUTO

AVIATION

WORKERS’COMPENSATION

Risk Aggregation Perspective defining riskappetite

capturing exposure

information

measuring catastropheexposures

managing exposures

CHANCE

COMMUNITY CHEST

FREEPARKING

VISITING

JUS

T

IN

JAIL

COLLECT

£200

AS

YOU PASSCOMMUNITY

CHEST

COMM

UNIT

Y CH

EST

INCOMETAX

ELECTRICCOMPANY

COMMUNITY CHEST

WATER WORKS

KINGS CROSS

STATION6

MAYLEBONE STATION

FENCURCHSTREET STATION

LIVE

RPOO

LST

REET

ST

ATIO

N

CATASTROPHE RISKS

EXPOSURE AGGREGATIO

N BOARD G

AME

LUXU

RYTA

X

Measuring Catastrophe Exposures defining riskappetite

capturing exposure

information

measuring catastropheexposures

managing exposures

10

Target RiskAppetite

Current RiskPosition

Reinsurance5

1

Annual Loss $m

5 10 15

Exce

edan

cePr

obab

ility/

%

Gross of Reinsurance

0

Target RiskAppetite

10

5

1

Annual Loss $m

5 15

Exce

edan

cePr

obab

ility/

%

Net of Reinsurance

0

defining riskappetite

capturing exposure

information

measuring catastropheexposures

managing exposuresManaging Exposures

Catastrophe RiskAggregation

Risk 1

UW Decision

Marginal Pricing Capitalisation Reinsurance

Strategy

Risk n

CURRENT DEVELOPMENTS

Speedometer for Underwriting

reliable real-time

all terrain

Robust Processes & Controls

UW Silo Culture• underwriting culture for certain classes

• class-specific aggregates monitoring

• becoming a business partner for UW

Controls Framework• time consuming & complex processes

• quality assurance

• process automation

Exposure Leakage• exposure growth

• non-geocoding exposures

• non-modelled accounts

• non-captured exposures

Catastrophe Modelling• model selection

• data quality

• modelling assumptions/third party modelling

• non-modelled elements

• adjustments to modelling outputs

Real-Time & All-Terrain

“macro” models:think “macro-economics vs. micro-economics”.based on hedge-fund risk assessment frameworks.decomposition of risk factors and key drivers.striking the right balance between accuracy, complexity and robustness.more easily expandable beyond pure catastrophe risks.faster analysis… real-time?still work in progress…

a wider spectrum of risks.

WIDER RISKS

Terrorism

"Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we."

Likelihood

Geography Damag

e

Terrorism Modelling

Source: RMS

Epidemics

Influenza pandemics are recurring events. The world may be on the brink of another pandemic.All countries will be affected.Widespread illness will occur.Medical supplies will be inadequate.Large numbers of deaths will occur.Economic and social disruption will be great.

Source: World Health Organisation – Oct 2005

CONCLUSIONS

Key things to take away

Catastrophe risk aggregations monitoring is becoming increasingly important in the long term management of a cat exposed (re) insurer

There are a number of external parties that want information on the level of catastrophe aggregations and how they are monitored. Examples include capital providers, rating agencies, regulators and Lloyd’s.

The market is evolving quickly and requires a more robust approach than has historically been used.